What First Time Buyers Need to Know About Their Mortgage

There are distinct differences between conventional loans and mortgages offered through various government agencies

There's much more to home buying than simply finding the perfect residence and convincing a lender to finance your purchase. The mortgage process can be overwhelming, especially when it's your first mortgage. It's filled with reams of paperwork, loaded with terminology and fees you don't understand and involves numerous people. Before you begin scouring real estate listings and house hunting in earnest, it's crucial you learn all about mortgages, so you know what to expect when you apply for your first mortgage.

Get Pre-Approved

It's important you get pre-approved for your first mortgage before you begin your home search. This gives you more bargaining power, which is important in a competitive market. Your pre-approval letter includes the lender's conditional commitment to lend you a set amount of money to purchase a home. You don't have to accept this entire amount, you're simply pre-approved to receive a loan up to this amount. This figure becomes your spending limit, which you use to sort through home based on your price range.

Know What You Can Afford

First-time home buyers are often surprised at the loan amount they're offered. When this amount is more than you expect, you might be tempted to buy a bigger and/or more expensive house. However, just because you qualify for a higher amount, doesn't mean you can afford it. Before you go deeper into debt on your first mortgage, know how much house you can afford. Figure your monthly income and track your monthly expenses. Next, determine how much you can comfortably spend on your house payment each month. Standard budgets suggest using no more than 28% of your net income for housing costs, which includes homeowner's insurance and property taxes. Use an online mortgage calculator or talk to a home loan expert to see how your finances stack up when compared to current mortgage interest rates, use an online.

Explore Your Options

There are many different types of mortgages available, so you need to know how each one works. There are distinct differences between conventional loans and mortgages offered through various government agencies, such as the Federal Housing Authority (FHA), Veteran's Authority (VA) and United States Department of Agriculture (USDA). Government-sanctioned loan backers like Fannie Mae and Freddie Mac also offer numerous mortgage programs to meet various needs. Compare each agency's loan types, down payment amounts, APR (annual percentage rate) options and other terms to find the best first mortgage for you. Investigate several lenders. Some lenders are good for any first-time home buyer overall, while others gear their programs toward buyers with little money to put down on a home or have less than perfect credit or a limited credit history. Your financial situation dictates which type(s) of lenders to seek out. FHA loans are typically go-to programs for many first-time homebuyers, especially those with a questionable credit history.

Understand the Fees

There are many fees involved to get your first mortgage. You need to understand each of them, especially the negotiable ones. When you convince a lender to lower the amount of a fee or eliminate it altogether, you save money. Use a lender's desire to gain your business to find out how flexible they are on fees, like loan origination, processing and underwriting fees. You can sometimes negotiate these fees down to half the amount or even get them waived completely, if the lender really wants to make you a customer.

Understanding the fees on your first mortgage, also keeps you from getting surprised by your settlement statement at closing. Consider hiring a real estate attorney to point out customary fees and bogus ones. Always compare the fees on your initial loan estimate and your final settlement to ensure none of the amounts changed. If there's a substantial difference, demand an explanation from your lender before signing the final paperwork.

Eliminate Private Mortgage Insurance (PMI)

PMI increases your monthly payment and is required anytime you put less than 20% down on a home purchase. Since many first-time home buyers can't afford a 20% down payment, PMI is common and it can add $100 or more to your monthly payment. As soon as you make enough payments to achieve 20% equity in your home, you can cancel your PMI. However, don't expect your lender to tell you when you reach this amount or remind you to cancel your PMI. Keep track of when and how you can eliminate your monthly PMI payments to save money.

Before you apply for your first mortgage, you benefit from talking to a homeownership education counselor. They'll teach you all about homebuying and financial readiness. Appropriate homebuyer education can also help you successfully sustain your homeownership.